Q2 GDP revised up to 0.3%

Economy avoids negative quarter, at least for now

WASHIINGTON (CBS.MW) - The U.S. economy grew slightly faster in the second quarter than the government had previously thought.

U.S. gross domestic product rose at a seasonally adjusted annual rate of 0.3 percent in the April through June quarter, the Commerce Department said Friday. The third and final estimate was a tenth of a percentage point higher than the second estimate of 0.2 percent growth released a month ago. Read the release.

Economists surveyed by CBS.MarketWatch.com forecast a revision down to 0.1 percent.

It's a small thing and a relatively irrelevant one at this point, with the nation facing a sharp decline due to the shock of terrorism. But avoiding a negative quarter for GDP is a psychological boost.

The nation might not be so lucky in the third quarter, which concludes Sunday. After the Sept. 11 terror attacks momentarily stopped the nation's economic heartbeat, economists have lowered their forecasts for the third quarter.

The latest consensus estimate is for the economy to have shrunk by 0.3 percent, which would be the first negative quarter since 1993. The fourth quarter is shaping up even weaker.

Consumer confidence is the crucial variable. The University of Michigan sentiment index fell to 81.8 in September from 91.5 in August on job worries and anxiety about the impact of terrorism. Confidence initially rallied just after the attacks, but fell sharply in the fourth week of the month. See full story.

Meanwhile, sentiment among manufacturers improved in September. The Chicago purchasing managers index rose to 46.6 in September from 43.5 in August, beating forecasts. Production at Midwest factories rose. The national index will be released Monday. See full story.

"The downward pressures on aggregate demand are likely to be fundamental and long lasting," said Jan Hatzius, an economist at Goldman Sachs. "The primary reason lies in very weak consumer fundamentals."

However, others believe the economy could come back quickly. "Massive monetary stimulus, incredibly large increases in government expenditures and a cutback in imports should soften the consumption blow," said Joel Naroff, president of Naroff Economic Advisers. "Don't rule out an increase just yet," he said of fourth-quarter GDP.

The economy has grown at less than 2 percent in each of the past four quarters after growing at more than 4 percent in the previous three years. GDP grew at a 1.3 percent pace in the first quarter.

The Federal Reserve meets again Tuesday to discuss what further actions the central bank ought to do to restore stability, confidence and growth. The Fed has cut its overnight funds target eight times this year, including a 50-basis point cut a week after the attacks.

The Fed also flooded the economy with money to prevent the intricate system of international and corporate finance from seizing up. The Fed has now reabsorbed much of that extra cash.

Most observers expect another 50-basis point cut in the federal funds rate to 2.5 percent on Tuesday.

The small revision to second-quarter GDP was due to a downward revision to imports of services. Fewer imports reflect weaker U.S. domestic demand, but due to the arithmetic of GDP, this weakness is a positive.

In current dollars, second-quarter GDP was $10.2 trillion at an annual rate.

The biggest source of growth in the second quarter was consumer spending, which rose 2.5 percent.

Business investment fell 14.6 percent, including a drop of 15.4 percent in equipment and software. Residential investment rose 5.9 percent.

Inventories fell by $38.3 billion in the quarter, reducing GDP by 0.4 percentage points. Final sales of goods and services produced in the United States rose 0.7 percent.

Exports fell 11.9 percent while imports fell 8.4 percent.

Government spending rose 5 percent.

While growth was slightly stronger than the previous estimate, inflation was slightly tamer. The gross domestic purchases price index rose 1.3 percent, down a tenth from last month's estimate. Prices rose at an annual rate of 2.7 percent in the first quarter.

Corporate profits were also revised lower modestly. After-tax profits from current production fell 3.8 percent (rather than 3.6 percent) to a level 13.2 percent lower than in the second-quarter of 2000.

Profits were reduced by $19 billion due to Tropical Storm Allison and other storms.

Rex
Nutting

Rex Nutting is a columnist and MarketWatch's international commentary editor, based in Washington. Follow him on Twitter @RexNutting.

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